Finance & economics The Economist March 21st 2020
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'·The cash crisis
Down the drain
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A plumber's gaide to how America's financial l)Stem seized up
H
OUSEHOLDS ARB frantically Stocking
up on essentials such as loo roll. But in
financial markets, the staple that no one
can do without in times of stress is cash-
the flushing mechanism of theworld econ-
omy. In theory, it should never dry up:
money can be printed. But when firms are
desperate for cash it puts a potentially dev-
astating stlain on the plumbing of the glo-
bal financial system. That is why in the past
week America's Federal Reserve has un-
leashed a huge amount of liquidity. Foreign
centtal banks have joined in. Many face the
additional challenge of a strengthening
dollar (see next article).
Unlike the 2007-09 financial crisis,
when problems in the financial system
ca.used an economic meltdown, the spread
of the covid-19 disease has caused a health
and economic crisis that has caught banks,
financial markets and business in its wake.
Bigandsma.llfirmsrea.lisethattheyarefac-
iug-at the least-months of scant rev-
enues, yet still have bills and debts to pay.
some are better equipped than others
(see left-hand chart). The operating ex-
penses (opex), like wages and rent, of all
nonbank SlkP soo companies in .2019
amounted to $2.6tm. The same firms held
$1.7tm in cash and liquid securities at the
endofthatyear. on average, thatwas about
seven months of opex. But this cash is un-
evenly distributed. Apple could pay for six
years of opex with its $2oobn war chest.
Many big utilities, such as Edison Interna-
tional, cany only enough ca.sh to cover a
week's worth.
The quickest way for investors, firms- Rushed .,.,
S&P 500, nan.fln1ncl1I f111111, 1019 or latest
log scale
Debt-~martu!t<apitalisation ratio 10
General Electric '!'Firm Is haavlly
"-. ~~ 1Apple •
0.1 1Edison lnt1 O. l0.01
~Flrmw111nm
Ollt Gf«11Sh quiclly O.OOl
10 100 500
Operating411p11ndltu~•aish nitio
Socircs: Bloom~ Dl!tntream !ram R!finitiv-7 Also in this section62 Buttonwood: Market capitulation
63 The surging dollar
64 Closing stock exchanges
64 The value of exchange-traded funds
65 Freeexchange:Ahistoryofslumps
and reboundsand banks to Ia.ise cash is to sell liquid as-
sets. Investors moved first. Their priority
was to liquidate holdings of risky assets,
like stocks and high-yield bonds, a.nd buy
safe assets like Treasuries. Markets moved
accordingly: the s&P soo bas sold off hard
and fast (see right-hand cha.rt) and bond
yields rallied. But companies and banks
tend to bold their liquid assets in Treasur-
ies. When their need for cash became dire,
they dumped even these.
Asset sales help reallocate the stock of
existing cash. For every investor selling
stocks or bonds to raise cash, there are
those willing to take the other side-like
warren Buffett. the fabled "be greedy only
when others are fearful• investor, who held
$125bn in "dry-powder" at Berkshire Hath-
away, his investment firm, at the end of- He has already snapped up shares in ~
S&P 500 msha. a1mul1tlve 1111 decline
relative to peek
" 0-201 100 200 300 400 500 600 664
Days Into aaah